According to Jeff Nelson at PricewaterhouseCoopers (PwC), "The transaction described is fairly common in the industry, and customers and dealers should be able to structure these types of contingent/consignment value contracts in compliance with the rules of IRC Sec. 1031, even without the services of a Qualified Intermediary. However, Like Kind Exchange is extremely dependent on the proper form of the transaction. There are no shortcuts and customers/dealers must be careful to respect that form when structuring their trade-ins."
On the other hand, Jim Burnett at Accruit LLC, states, "Pass-throughs without a Qualified Intermediary involved may fall outside of the safe harbor guidelines as established in IRC 1031. The fact that there is typically a delay between the time the original asset is transferred to a dealer and the date replacement property is acquired raises questions.
"Like Kind Exchanges are not optional," he continues. "Guidance suggests that 1031 exchanges are 'form over substance,' meaning that if it looks like an exchange, the taxpayer must follow a specific process, including execution of an exchange agreement; notification of assignment in writing; inclusion of a Qualified Intermediary (to avoid constructive receipt); and completion of Form 8824 as part of the taxpayer's tax filing. Additionally, given the tremendous benefit and low cost of single exchanges, even the smallest equipment transaction can be run as a safe harbor LKE."
Clearly, LKEs are complicated and even the experts have a hard time agreeing on certain issues. To obtain further clarification on this topic, Jeff Nelson can be reached at (612) 889-5973 or email@example.com. In addition, Accruit offers a document that discusses the issue in more detail. Please contact Accruit at (720) 963-5000 to receive a copy.
LKEs can provide a significant benefit for contractors if used properly. Please make an effort to understand the basic LKE qualification concepts, and be wary of any transaction where a qualified intermediary is not part of the process. The sales tax issues should also be reviewed with your tax advisor.
Garry Bartecki is director of dealer/distributor services at BDO Seidman, LLP of Chicago, as well as a consultant to the AED. He has also worked as an independent CPA and consultant to equipment dealers. He can be reached at (312) 616-4677 or firstname.lastname@example.org.
Disclaimer: This article is not intended to be tax advice. Contact your tax accountant for professional tax services.